What are Directors liabilities if you wind up the company?

Winding up is the forced closure of a company, and is a process normally started by one of the company's creditors because outstanding debts have not been paid.

A review will be carried out by the liquidator on the actions of anyone who acted as a director of the company. This will be looking at whether they allowed the business to trade while insolvent.

A company being wound up is normally in financial trouble and therefore the creditors are unlikely to receive much return on the money owed. The creditor's main objective is to stop the company from trading and to force an investigation into the conduct of the directors. If they are shown to have been guilty of 'wrongful trading' then they will become personally liable for the debt.

Company directors investigated in Winding Up

The liquidator must carry out an investigation into the conduct of the company directors if the business is wound up.

This investigation is undertaken on any current director or anyone who has been a director of the company in the last three years. The liquidator can also investigate any individual who has acted in the capacity of a director although not registered as such at Companies House.

What the liquidator is looking for is whether there has been proper management of the company. They will check if the directors allowed the business to continue to trade while knowing it was insolvent. This is a serious breach of the duties of a director and is called 'wrongful trading'.

Actions against directors of insolvent companies

Once the liquidator has completed their investigation, they will submit their report on the directors' conduct to the Insolvency Service. This is known as a directors' disqualification report or D1.

If the liquidator believes that any director has been involved in wrongful trading, they will recommend that the insolvency service take action against the director.

The insolvency service will consider two main actions:

a) Director disqualification - If found to have allowed a company to trade while insolvent, a director could be disqualified from continuing to act as a director for other businesses. If disqualified, a director will have to stand down from any other directorships they hold. The ban may last for a year or longer depending on the conduct of the director

b) Personal liability for company debt - A director accused of wrongful trading can be held personally liable for debts incurred by the company after the director knew that the business was insolvent. This may have serious implications on the director's personal financial situation

Because of the possibility that a director may be disqualified or held personally liable for a company's debts, winding up is an extremely serious process for company directors.

For this reason, if as a company director, you believe that your business is struggling financially and may be at risk of trading while insolvent, you should take professional advice as soon as possible.

If the business should be closed, the directors will be far better protected if they initiate the process themselves using voluntary liquidation.

There are alternative solutions that may save the company and avoid any need for investigation, these include Company Voluntary Arrangement.

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If as a Director your business is in financial difficulty why not talk to us about solutions, more info at
http://coopermatthews.com/company-voluntary-arrangement.html

Derek Cooper is Managing Director of Cooper Matthews Limited.

Cooper Matthews specialise in Business Debt Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses, working with Directors, Sole Traders and Self Employed.